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Ruling

Subject: Invalidity segment

Question

Is any part of the termination payment (ETP) received from the Employer tax-free as an invalidity segment under s82150 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You were originally diagnosed with your illness in 2015 with the medical professional ascertaining that the first symptoms presented in 2010.

You were employed on a full time basis with the Employer. As a result of your impairments you could no longer continue in this role.

In 2016 your medical professional strongly advised you to seek medical treatment as your condition had deteriorated. As a result of this you accessed your sick leave and submitted a Voluntary Medical Retirement (VMR) in 2017 which was encouraged by the Employer.

The VMR was accepted by the Employer and you accepted the offer to retire under the VMR arrangement.

You have supplied two medical certificates from two legally qualified medical practitioners, stating you are totally and permanently impaired due to your medical condition.

You received your final pay and this included a severance payment. No invalidity segment is shown on the payslip or calculation sheet from the employer provided.

Your PAYG payment summary – employment termination payment shows a taxable component and tax withheld amount.

Your normal age of retirement if not injured, would have been 65 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82 140.

Income Tax Assessment Act 1997 Section 82 150.

Income Tax Assessment Act 1997 Subsection 82 150(1).

Income Tax Assessment Act 1997 Subsection 82 150(2).

Reasons for decision

Summary

An amount included in the ETP is the invalidity segment which is tax-free and is excluded from your assessable income in the income year ended 30 June 2018.

Detailed reasoning

Invalidity segment

Subsection 82 150(1) of the ITAA 1997 states that:

An employment termination payment includes an invalidity segment if:

(a) the payment was made to a person because he or she stops being gainfully employed; and

(b) the person stopped being gainfully employed because he or she suffered from ill--health (whether physical or mental); and

(c) the gainful employment stopped before the person's last retirement day; and

(d) 2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in capacity for which he or she is reasonably qualified because of education, experience or training.

Gainful employment

Section 995 1 of the ITAA 1997 defines being gainfully employed as follows:

gainfully employed means employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.

Until your application for Voluntary Medical Retirement was accepted and approved, you were employed on a full time basis with the Employer.

Payment for stopping gainful employment

Your payment is considered to be a payment made on the termination of your employment as it satisfies the conditions under subparagraph 82-130(1)(a)(i) of the ITAA 1997.

The employment termination occurred because of the ill-health of the taxpayer

The requirement under paragraph 82-150(1)(b) of the ITAA 1997 is that the termination of employment resulted from the taxpayers ill health, that is, the ill health was the immediate cause for the termination of the taxpayers employment.

In this case, the facts show the termination of your employment with the Employer occurred after medical advice and the acceptance of your application for the Voluntary Medical Retirement due to your illness.

The termination of employment of the taxpayer occurred before the last retirement date in relation to the employment.

The third condition for a payment to qualify as an invalidity segment is that the termination of employment occurs before the taxpayers last retirement date.

Your last day of service with the employer was well before the retirement age of 65. Therefore, the condition set out under paragraph 82-150(1)(c) of the ITAA 1997 has been satisfied.

Certification from 2 legally qualified medical practitioners that the disability is likely to result in the taxpayer being unable ever to be employed.

In respect of this requirement, it must be demonstrated that the disability at the time of termination was such that:

It is unlikely that the person can ever be gainfully employed in capacity for which he or she is reasonably qualified because of education, experience or training.

Therefore, paragraph 82-150(1)(d) of the ITAA 1997 requires that there must be the likelihood that the disability of the taxpayer will preclude the taxpayer from ever being employed in a role, for which the taxpayer is reasonably qualified.

In this case, two legally qualified medical practitioners have each provided you with Certificates of incapacity and signed a declaration certifying that you are suffering from ill-health and, because of the ill-health, you are totally and permanently impaired.

As two medical practitioners have provided certificates that attest to you being unable to ever be employed in a capacity for which you are reasonably qualified because of education, training or experience, it is considered that the final condition of subsection 82-150(1) of the ITAA 1997 has been satisfied.

Tax exemption for an invalidity payment

Under section 82-140 of the ITAA 1997 the invalidity segment included in an ETP is tax free.

An ETP comprises the following components:

Tax free component this includes the invalidity segment or pre-July 83 component (if any); and

Taxable component the amount remaining after deducting the tax free component from the total payment.

As you have satisfied the requirements for the payment of an invalidity payment, an element of the ETP received from the Employer will be tax free.

The amount of the invalidity segment is worked out by applying the formula in subsection 82-150(2) of the ITAA 1997:

Work out the amount of the invalidity segment by applying the following formula:

Amount of ETP	x	Days to retirement
		Employment days + Days to retirement

where:

days to retirement is the number of days from the day on which the person's employment was terminated to the last retirement day.

employment days is the number of days of employment to which the payment relates.

Therefore, the amount worked out using the above is the invalidity segment which should be included in the ETP which is tax free and excluded from the assessable income in the income year ended 30 June 2018. The remaining ETP amount will remain as a taxable component, and will be included in the assessable income and taxed at the marginal rate of tax.

Conclusion

The ETP payment satisfies all the requirements under subsection 80 150(1) of the ITAA 1997. Consequently an amount is considered to be an invalidity segment for the purposes of subsection 82 150(1) of the ITAA 1997.